Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 35 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 18 percent. What is the external financing needed?

Question

Business

Karma Richards

14 June, 21:33

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 35 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 18 percent. What is the external financing needed?

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Answers (1)

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Hamilton · Answer 1

Missing information:

Balance sheet

Current assets $3,300 Current liabilities $2,200

Fixed assets $10,200 Long-term debt $3,750

Equity $7,550

Total $13,500 Total $13,500

Income statement

Sales $6,600

Costs $5,250

Taxable income $1,350

Taxes (34%) $459

Net income $891

Answer:

$1,350.60

Explanation:

external financing needed = [ (assets / sales) x ($ Δ sales) ] - [ (current liabilities / sales) x ($ Δ sales) ] - [profit margin x forecasted sales x (1 - dividend payout ratio) ]

EFN = [ ($13,500 / $6,600) x $1,188] - [ ($2,200 / $6,600) x $1,188] - [ (0.135 x $7,788 x (1 - 0.35) ]

EFN = $2,430 - $396 - $683.40 = $1,350.60

External financing refers to the amount of money that a business must either borrow or raise capital in order to keep operating as they have been doing so.